No Pain, No Gain: The connection's good, but it's too early to call

Share consolidation is an exercise that appeals to many directors.

Share consolidation is an exercise that appeals to many directors. There seems to be a deep rooted feeling that it is better to preside over a company with, say, a 50p share price than one where the shares are bumping along at a measly few coppers. I suspect most shareholders could not care less. They are in the investment game to make money. And it is possible, of course, to reap rich rewards (and suffer horrendous losses) whatever the value of a share.

However, it may be foolish to regard a consolidation (when usually 20 shares become one) as merely a cosmetic makeover. Although any capital reorganisation is a costly undertaking, there must be eventual savings when the number of shares in issue is dramatically reduced. There are also expectations that the spread between the buying and selling price will become more tolerable. But the big question is whether, as some believe, it has an uplifting influence on the share price.

The stock market is littered with examples of when turning a flyweight into a heavyweight has failed to have any rewarding impact. Continental Foods, quite a successful business, grew tired of an unflattering share price. So it hit upon the idea of a big consolidation which, it fondly imagined, would produce a share price of more than 100p. It didn't work. The shares hovered around 100p for a while and then slipped to about 60p. Not long afterwards, the company was taken over at 108p a price well beyond the stock market's radar. More recently Galleon, an active little intellectual property group, indulged in a massive consolidation. Any reward has yet to filter through to shareholders.

But not all consolidations end in tears. One company that appears to be convinced it should leave the ranks of the penny stocks is IDN Telecom, a successful little enterprise that last week enjoyed the distinction of reporting a 155 per cent profit advance. Clearly it is no slouch in the performance stakes but it thinks its endeavours would be appreciated much more if its shares, now around 3p, commanded a higher price. I have no idea what the terms of any consolidation will be but I suspect any capital changes will go alongside corporate action.

For IDN is on the look out for acquisitions, probably bolt ons, although the chance of a significant buy would not be turned away. Since its shares arrived on the stock market in 2000 - too late to enjoy the internet explosion - they have remained in the low price basement. Their highest level is around 6.5p.

In its early stock market days IDN failed to cover itself in glory. Losses mounted. Then the current chief executive, Mike Morrison, took charge. Within a short time IDN was making profits, albeit a mere £5,000 over six months. But in the year to October 2003, profits grew to £258,000. Last year's figure was £659,000 (representing 5 per cent of revenue) with SQC Research predicting £900,000 this year and £1.175m next. Tax losses, which should protect earnings for a time, tot up to £2.6m. And there is cash (around £200,000) in the bank.

Under its new management IDN (Independent Digital Networks) has evolved from a loss making company offering basic telephone services into a successful and wide ranging telecommunications consultancy. Its expertise lies in analysing a company's communication needs and providing the most appropriate and cost-effective solution. There are approaching 1,000 customers, mainly small and medium sized organisations. Says chairman Barry Roberts: "Our clients are too small for the big boys to worry about and too big for the small operators to service. IDN, as a sideline, also has a directory inquiries services (118522), which taps into the BT directory system.

It is capitalised at around £12m. With nearly 388m shares in circulation and more than 1,000 shareholders the temp-tation to go for a consolidation is obvious. IDN is a smashing little company which would be ideal for the no pain, no gain portfolio. It is well run and has the potential to evolve into a significant player in the growing telecommunications industry.

But two possible influences prompt me to hesitate over its inclusion. Former directors are still significant shareholders. They have been selling and I believe will continue to do so. The other worry is that consolidation. Shareholders may well benefit but I think, in view of past experiences, I would rather wait until its impact is assessable. So I have decided to keep my ammunition dry. After all, this particular telephone connection will become much clearer when the share overhang is eliminated and the reaction to the share reorganisation is apparent.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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